A US$8 billion dispute between a hedge fund manager and Deutsche Bank has made its way to the courts.

Sebastian Holdings and Deutsche Bank are set to duke it out in a London courtroom over the next 12 weeks, the latter seeking payment of a US$250 million margin call, and the former demanding as much as US$8 billion in damages.

Sebastian, led by Norwegian billionaire Alexander Vik, suffered "very significant" losses on options trades made by trader Klaus Said when Deutsche Bank, Sebastian's prime broker, demanded US$530 million in collateral and, when it didn't receive it, began liquidating the hedge fund's positions. The latter, Sebastian said, cost it some potentially profitable positions, leading to losses and lost profits of US$2.5 billion.

According to Sebastian, Deutsche Bank allowed Said to go beyond pre-agreed trading limits. "The bank at least suspected, and more probably was consciously aware, that Mr. Said was not acting" with Vik's approval, the lawsuit alleges.

Said, now head of foreign exchange at CRT Capital Group, will not testify at the trial.

Deutsche Bank counters that Sebastian's countersuit is little more than a claim that the bank should have done his job for him, asking that it be held responsible for "in effect" managing Mr. Said's trading on SHI's behalf, to keep it within particular limits of exposure."

"Mr. Said himself has consistently acknowledged that the reason why his trading lost so much money was the effect of the extraordinary market conditions of the last quarter of 2008 on the particular trading strategy he had adopted," the bank continued.

The lawsuit "is about a margin call that was missed and remains unpaid," a Deutsche Bank spokesman told Bloomberg News.

Sebastian has also brought litigation against Deutsche Bank in New York.

From the current issue of

The ratio calendar combination spread couples two ratio calendar spreads, one using calls and the other using puts. The call strike prices are higher than the put strike prices. This strategy is complex and profit is limited, but if a high amount of time value is involved in the short positions, that profit can be substantial and risk is still limited.